United Kingdom Employment Appeal Tribunal

APPEARANCES

 

For the Appellant	MR M DUGGAN (OF COUNSEL) MESSRS VANDER PUMP & SYKES LOUGH POINT 2 GLADBECK WAY ENFIELD MIDDLESEX EN2 7JB
For the Respondent	MR N MOSS (OF COUNSEL) MR A TUREK THE TREASURY SOLICITOR QUEEN ANNE'S CHAMBERS 28 THE BROADWAY LONDON SW1H 9JS


 


MR JUSTICE LINDSAY : Openhand Ltd was a company that owned and conducted a business which was or included that of being belt and buckle manufacturer or distributor, which business had been begun by Mr Georgiou senior. Within a year of its setting up (the date for which does not appear but which was probably 1981 or earlier) two sons and one son-in-law of Mr Georgiou senior became shareholders in the company. By the time with which this appeal is concerned the capital of the company was divided equally, one third each, between A ordinary shares, B ordinary shares and C ordinary shares. It may well have been so divided from the moment when those three became shareholders. The articles contained provisions so that the balance between those three classes of shares which were respectively held by the two sons and the son-in-law should be broadly preserved between those three branches of the family. There was, for example, to be an A director, a B director and a C director, each appointed and generally to be removed by the corresponding class of shareholders. There was an express provision whereunder a director might:-

" hold and be remunerated in respect of any office or place of profit under the company".

1. Each of Mr G Georgiou, Mr M Georgiou and Mr C Socrates, whom we shall call together the claimants and who are respectively those two sons and that one son-in-law, were thus able, although they were respectively A, B and C directors and, seemingly, the only directors of the company, to be employees of the company.
2. On or about the 28^th May 1997, the company passed a resolution (which we have not seen) for what was from the outset, or soon transpired to be, a creditors voluntary liquidation. On the 17^th June 1997, a liquidator was appointed. The company was insolvent, though neither we nor the employment tribunal have or had any details of, for example, the deficiency, if any, as to preferential, secured, or ordinary creditors, nor as to the sums owing to Crown, trade or banking creditors.
3. The claimants each separately applied to the Redundancy Payments Service of the Department of Trade and Industry for redundancy money and for related payments to be made to them from the National Insurance Fund by reason of the company's insolvency. Their claims were rejected;

"the reason being that this department does not consider you to have held employees status with [the company]"

4. Each of the three claimants lodged at IT1 for unpaid salary, holiday pay, notice and redundancy money, although the forms IT1 differ a little from one to another. The features which Mr G Georgiou asserted in support of his claims to be an employee included working on a daily basis, having a contract of employment, not being able to take time off without the permission of another or others, being paid on weekly basis, having his tax and NIC deducted at source as was the case (he said) with the rest of the staff, that he was only a minority, ie a one third shareholder, and his having worked for the company for many years". "I had no overall power to change what happened to the company" said George Georgiou in his Industrial Tribunal 1.
5. His brother Michael Georgiou said he had had to be at his job every day to service his customers and that any time off had to be agreed with the other two. He said he had to obey the terms of his contract of employment and could not make any outright decisions for the company other than in his day-to-day role. He, too, said he was paid weekly and was on the company's PAYE scheme "like all other employees".
6. Chris Socratous asserted that he had worked 40 hours every week as stated in his contract and was taxed "like all other employees". Other than decisions in his own particular area, which related to machinery, "any other decisions" had to be agreed with the other directors. "I did not own enough shares in the company to allow me to make my own decisions without the approval of others. If I wanted to leave the company I had to give notice of one week for every year worked as in my contract".
7. Although the particular features thus relied on by the three claimants in their claims to be employed thus varied a little from one to another, the gist of their cases raised the question of whether they were, indeed, employees, which question became the only main issue at a hearing before the Employment Tribunal at London North on 19^th February 1998, where the matter had been listed to come on a "floater". The unanimous decision of the Employment Tribunal was "that the applicant's are not employees for the purpose of the Employment Rights Act 1996 and therefore are not entitled to a redundancy payment". The decision was sent to the parties on the 13^th March 1998 and on 28^th April the Employment Appeal Tribunal received the claimants notice of appeal.
8. On 30^th November 1998 at the preliminary hearing of the Employment Appeal Tribunal the point emerged that the whole hearing on the 19^th February 1998, at which the claimants had appeared only in person, had taken only, it was then claimed, some 20 minutes and that relevant authorities had not been cited, not, perhaps, unsurprisingly by the claimants, but not either by Mr Ibezi, an employee of the DTI who at that hearing had represented the DTI.
9. The Employment Appeal Tribunal's order of the 30^th November 1998 included, inter alia, "The tribunal further orders that the Appellant's do swear and lodge an affidavit setting out the timing and format of the hearing; the role of Ibezi at the hearing; whether the authorities of Bottrill and Fleming where cited ; whether the Employment Tribunal were informed that all times the Appellant's drew their full salaries and that all of the documents before the Employment do be exhibited to the aforesaid affidavit". Then, a little later, the tribunal further orders that the aforesaid affidavit be copied to each Respondent for their response and that those responses and the affidavit be then sent to the Employment Tribunal chairman for his comments thereon. The Tribunal further ordered that the Chairman's notes of evidence do be were to be called for.
10. George Georgiou's subsequent statement made the pursuant to that direction indicates that the Full Hearing took about 25 minutes. We will need to revert later to some points emerging from his evidence. We have copies of the complete bundle of documents which were laid before the Employment Tribunal. It includes 3 full written standard forms of Employment Contract made with the Company, each some six and a half pages of type, script, for each of the claimants, each dated, it seems, the 1^st January 1982 (they are poorly photocopied). Each contract has headings such as "term", "duties", "salary" and so on as one might expect of a conventionally-drawn contract of employment. The duration of the contract is to continue beyond the initial one year until notice was given. It was not said at any stage that the contracts were not genuine nor that their date was not genuine nor that they had been varied or abandoned since creation in 1982. It is to be remembered that section 230(1) subsection one of the Employment Rights 1996 defines an employee for the purposes of that Act as an individual who has entered into or works under (or, where the employment has ceased, worked under) a contract of employment and section 230 (2) defines a contract of employment as meaning contract of service… "express or implied….oral or in writing". Hardly surprising, then, that, as was said in the recent case dealing with an employee shareholder, namely Secretary of State for Trade and Industry against Bottrilll [1999] IRLR 326CA331

"the first question which the tribunal is very likely to wish to consider is whether there is or has been a genuine contract between the company and the shareholder. In this context, how and for what reason the contract came into existence, (for example, whether the contract was made at a time when insolvency loomed and what each party actually did pursuant to the contract are likely to be relevant considerations"

11. The contracts here were on the face of things made some 15 years before, insolvency loomed in 1997. There was, so far as we can tell, very little investigation by the Employment Tribunal "of what each party actually did pursuant to the contract". No chairman's notes of evidence are available, despite the order of the Employment Appeal Tribunal of the 30^th November 1998. The Chairman, invited to comment on Mr Georgiou's statement, indicates that he has no real comments to make. As for the contracts, the Employment Tribunal said

"there is no doubt that a contract of employment was issued in respect of each applicant signed by one of the other directors. It is said by the three applicants that they were employees, that none of them had overall control, that any two could dismiss the third and that were therefore employees entitled to a redundancy payment when the company went into liquidation".

12. The Tribunal in turned to the law and held "It is setted law hat there is no one factor which determines whether a person is or is not an employee. The Redundancy Payment Office has issued an advisory document which was sent to the Applicants, setting out the law. The Tribunal has considered those documents and in particular the various cases quoted". It is unfortunate that the Employment Tribunal had its attention drawn only to the Redundancy Payment Services' note on the law because that note left unmentioned Fleming v. the Secretary of State for Trade and Industry [1997] IRLR 682 CS and the Bottrill case in the Employment Appeal Tribunal, which, by the time of the hearing, must have come to the DTI's notice as the DTI was a party to the case and as judgement in the Employment Appeal Tribunal in the Bottrill case had been given on 12^th January 1998.
13. Both Fleming and Bottrill in the Employment Appeal Tribunal throw doubt on the reasoning of Buchan against the Secretary of State and Ivey against the Secretary of State, both of which were mentioned in the Redundancy Payment Services' note which the Tribunal indicated they had paid particular regard to. There are then in the findings of the Employment Tribunal, three crucial paragraphs as follows:

"In evidence, Mr G Georgiou admitted that towards the end when the company was in difficulty, the directors did not take their full salary but the most important and in the Tribunal's view the decisive factor was that the an [sic] overdraft guaranteed by way of debenture secured by all three applicants personally. In the Tribunal's view, this indicates that there was no separation of the applicants as employees and the company.

It is clearly not normal for an employee to put his house an [sic] property at risk in favour of his employer's business".

In all the circumstances therefore we find that the applicants were not employees and their entitlement to a redundancy payment must be rejected".

14. The Employment Tribunal went on to extend time in the applicant's favour but there has been no appeal concerning that. Mr Duggan for the claimants attacks those two conclusions, namely that the Directors did not take full salaries "towards the end" and the effect of the claimants' guarantees. We will take the two subjects separately.
15. Mr George Georgiou's statement says that the claimants had never taken a pay cut leading up to the closure. The claimant's notice of appeal asserted that he had clearly said the opposite to the Tribunal's conclusion and that the three had always taken salaries whilst employed. The point is also made that the bundle laid before the tribunal proved that the claimant's version was correct and that the tribunal must therefore have inadvertently misunderstood the oral evidence given. It is the case that the bundle contains printouts showing the three claimants having all been entitled to nett pay for the weeks ending 11^th April 1997 to the 23^rd May 1997 (the last Friday pay day before liquidation on the 28^th May) at what appears to be an unabated high level. The claimants could hardly have it taken as a feature against them that they had not "taken" salaries on the next Friday after 23^rd May 1997 as by then the company was in liquidation.
16. We are left in an unfortunate position as to the full salaries. Mr George Georgiou's evidence, apparently supported by the paper laid before the Tribunal, suggests there was "no voluntary taking of less than full salaries towards the end". The chairman, although the Employment Appeal Tribunal's order requests notes from him, produces no notes to counter those documents and, indeed, no notes of evidence at all and says further that he has no real comments to make on Mr George Georgiou's evidence. However, he adds "my recollection is as set out in paragraph 12 of the Tribunal's decision namely that shortly prior to the liquidation the Directors did not take their full salary". He does not attempt to reconcile that with the bundle which the Employment Appeal Tribunal had before it. In the ordinary way we could have expected assistance also from the DTI's representative on the day, Mr Ibezi, but the DTI, despite a strenuous search, cannot find him or the notes, if any, which had taken on the day. We are left with a very uneasy feeling that a simple mishearing of what was said on this subject, which was thereafter clearly left unexplored any further, may have led to one of the factors to which the Employment Appeal Tribunal plainly attributed real weight having had no true support whatsoever in the evidence.
17. As for the second of the two subjects, the "overdraft guaranteed by way of debenture", so far as we can judge from the totality of material now available as to the position at the hearing, the Employment Tribunal had no sight of any debenture, nor of any guarantee. The Tribunal was told that the directors had given personal guarantees, jointly and severally, of the companies overdraft, that the bank had a debenture "over the company" and they were told the size of the overdraft facility. But they did not ask and were not told that what, if any sum, was owing to the bank nor whether the company would be able to pay it out of the company's resources, nor whether the bank had called in or threatened to call in any of the claimant's guarantees, nor whether the guarantees were secured (Mr George Georgiou had said they were "personal" ), nor if they were secured, upon what they were secured nor whether they were "all monies" guarantees or limited in some way by reference, for example, to time or to amount. The tribunal had no evidence as to the ownership of houses by the three claimants nor what other property each had, if any, nor whether the houses they occupied or other property fell within or without whatever security, if any, supported the guarantees given to the bank.
18. It will be remembered that the Tribunal describe this aspect as "the most important and in the Tribunal's view, the decisive factor". We do not accept Mr Dugan's criticism of that word "decisive", as Mr Moss for the DTI, in the course of an attractive argument, pointed out, any one factor can be "decisive", even if a great many different factors, are, as they should be, taken into account. Indeed the Court of Appeal uses the very word decisive in such a sense in paragraph 23 of Bottrilll. But Mr Duggan rightly argued urges that the conclusion which the Tribunal arrived at on this "decisive factor", namely that it was not normal for an employee "to put his house and property at risk in favour of his employers business" was a speculative conclusion devoid of any support in the evidence given. Even had it been proved true Mr Duggan would wish to argue that it was not significant enough to be decisive against minority shareholders and directors who had put in 15 years unchallenged work under long established contracts of employment.
19. In their notice of appeal the claimants provide a long list of factors, unmentioned by the tribunal, to which, they say, the employment tribunal failed to give any consideration. We are not disposed to accept that the Tribunal so failed simply from the fact that such factors are not expressly mentioned. Moreover, we will very willingly accept that the question of whether a person is an employee or not is a question of fact and that the Tribunal is the master of fact. Mr Moss rightly reminds us of the familiar passage in O'Kelly against Trust House Forte plc [1983] IRLR 369 Court of Appeal page 381 paragraph 70, but that was a case in which the Tribunal was expressly held to have had evidence on which they could have reached their conclusion. By contrast, in in our case case which despite (or perhaps because of) its lasting only some 25 minutes, the Tribunal described as a difficult one, a case in which they came to a decision "on balance", the feature described by the tribunal as "the decisive factor" is one which, as far as can be ascertained, had no support at all in the evidence. It was a speculation. To base one's "decisive factor" on speculation is to err in law. We must set aside the decision on that account. Were it to transpire that the only other factor which the Tribunal referred to as pointing towards the conclusion it reached, namely the abandonment of full salaries towards the end, was, as could be the case, based on a simple mishearing or misunderstanding, that could only compound the error.
20. Mr Duggan urges us to hold that the claimants were employees. However, we feel unable to say with any certainty what the position would have been had there been no speculation on the Tribunal's part and perhaps no misunderstanding of the oral evidence. For us to conclude that the claimants were employees would rightly attract the very criticism that is levelled at the Tribunal, namely that it acted upon speculation rather than upon evidence. Accordingly, we remit the matter to a fresh Tribunal.
21. We add for completeness that Mr Moss very properly drew to our attention the as yet unreported case (save in The Times) of T Smith against Secretary of State for Trade and Industry. The parties had agreed between themselves not to raise the points there raised in relation to the Human Rights Act namely that the Employment Tribunal had not been, and this Employment Appeal Tribunal might not be, an independent tribunal. We need say nothing on that point.
22. We have greatly benefited from the ample citation of authorities to us and it is to be hoped that, second time round before the Employment Tribunal. The Tribunal will be given the assistance from qualified advisers and assistance which Mr Walker and his colleagues conspicuously failed to be given.
23. We allow the appeal and remit to a fresh tribunal.